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RANGE BINARY
A range binary pays out if a specified spot rate trades within a given range over a specified period of time, in exchange for the payment of an upfront premium. The lower the volatility of the spot rate, the more likely the buyer is to benefit.

REBATE
A rebate is paid to the holder of a derivative such as a barrier option if the instrument is knocked out or is never activated.

REFERENCE PRICE
In an energy derivatives contract, the settlement price of the contract based on a particular location or particular blend of the commodity.

REINVESTMENT RISK
The risk that an asset manager will be unable to match the yield from an interest-rate instrument, such as a swap, when reinvesting its coupon payments and principal repayments.

RELATIVE PERFORMANCE OPTION
An option which gives the purchaser the right to the return from a single asset from a basket of two or more, either as a cash settlement or by physical delivery. The asset selected may be the best or worst performing of the assets in the basket, as measured against a common or independent benchmark.

REPLACEMENT COST
The replacement cost of a financial instrument is its current market value. In credit risk terms, it is the cost of replacing a given contract if the counterparty defaults.

REPLICATION
To replicate the payout of an option by buying or selling other instruments. In the case of dynamic replication this involves dynamically buying or selling the underlying (or futures, where transaction costs are cheaper) in proportion to an option’s delta. In the case of static replication, the option is hedged with a basket of standard options whose composition does not change with time.

REPO AGREEMENT
To buy (or sell) a security while at the same time agreeing to sell (or buy) the same security at a predetermined future date. The price of the second transaction determines the repo rate, the interest rate earned on the security between the two transactions. In a reverse repo the buyer sells cash in exchange for a security.

RETAIL WHEELING
The use by a power company of another company’s transmission line to distribute power to one of its own customers.

REVERSAL
To take advantage of mispriced options by creating a synthetic long futures position and hedging it by selling futures contracts against it.

RHO
A measure of an option’s sensitivity to a change in interest rates; this will impact on both the future price of the option and the time value of the premium. Its impact increases with the maturity of the option.

RISK MANAGEMENT
Control and limitation of the risks faced by an organization due to its exposure to changes in financial market variables, such as foreign exchange and interest rates, equity and commodity prices or counterparty creditworthiness. This may be because of the financial impact of an adverse move in the market variable (market risk), because the organization is ill-prepared to respond to such a move (operational risk), because a counterparty defaults (credit risk) or because a specific contract is not enforceable (legal risk).
Market risks are usually managed by hedging with financial instruments, although a firm may also reduce risk by adjusting its business practices. While financial derivatives lend themselves to this purpose, risk can also be reduced through judicious use of the underlying assets, eg, by diversifying portfolios.

RISK MEASUREMENT
Assessment of a firm’s exposure to risk.

ROLL-LOCK SWAP
A swap that enables futures traders to lock in their roll-over costs by paying the average difference between near and far contracts.

ROLL-OVER RISK
The risk that a derivative hedge position will be at a loss at expiry, necessitating a cash payment when the expiring hedge is replaced with a new one.